Greed, debt, Bain and the death of KB

Posted
Saturday, September 8, 2012 10:09 pm

Sunday September 9, 2012

In trying to change the subject from Bain Capital, Republican presidential candidate Mitt Romney has talked a lot about reducing the nation’s debt. The irony of this strategy, according to Matt Taibbi in the Sep tember 13 issue of Rolling Stone, is that Mr. Romney "is one of the greatest and most irresponsible debt creators of all time." The impact of that debt creation strategy was seismic right here in Pittsfield with the demise of KB Toys, which Bain Capital purchased in 2000. Mr. Romney was supposedly gone from Bain a year earlier but the New York Times has revealed that he was an investor and beneficiary for 12 more years.

Much has been said and written this campaign about Bain Capital, a company that doesn’t build anything tangible but buys companies that do, usually struggling ones, redesigns them, and sends them off to sink or swim. Not enough has been said and written about Bain’s strategy of saddling these companies with huge debt that forces them to take all the risk while Bain profits through the magic of "dividend recapitulations" regardless of the fate of those companies.

In Mr. Taibbi’s article, entitled "Greed and Debt. How Mitt Romney and Bain Capital staged an epic wealth grab, destroyed jobs -- and stuck others with the bill," Heather Slavkin Corzo, the senior legal policy adviser for the AFL-CIO, succinctly described this complex strategy with an analogy. "The dividend recap is like borrowing someone else’s credit card to take out a cash advance, and then leaving them to pay it off," said Ms. Corzo.

Which brings us to KB, whose headquarters were in Pittsfield. It’s a sad and familiar story here in the Berkshires recapped and elaborated upon by Mr. Taibbi, who in his research visited an "Irish pub" here (we’ll bet it was Patrick’s) to meet with former high echelon employee Lenny Patnode, who was laid off in 2008 after 38 years with KB without a day’s severance.

Bain purchased KB for $320 million, with large banks financing all but $18 million of the purchase. About a year and a half later, Bain claimed its dividend recapitulation, forcing KB to redeem $121 million in stock and borrow $66 million. Of this total, $83 million went to Mr. Romney and other Bain owner and investors. KB slid into bankruptcy, never to re-emerge, while as Mr. Taibbi writes, Bain earned a return of at least 370 percent on its deal.

KB’s top management could have made a fuss but had millions of reasons for silence. CEO Michael Glazer received an $18.4 million bonus from Bain to smooth the deal and CFO Robert Feldman claimed a $4.8 million bonus. KB employees hit the bricks, most or all without severance packages or health insurance.

There is no denying that KB had a problems independent of Bain. It lost its prestige niche when it overexpanded into second-tier malls and was underpriced by big discount chains like Walmart. It didn’t react quickly to the advent of video and cell phone games. Bain, however, never offered KB Toys a strategy for survival, nor could it. There are no toy experts at Bain. Bain’s expertise is in making money for Bain, and burdened by debt thanks to Bain, KB Toys was doomed even it had developed a coherent business plan. An important and unique Berkshire company was gone, leaving an empty building downtown and loyal employees like Lenny Patnode out of work.

"In microcosm, the KB fiasco speaks to why corporate America is held in such low regard today," The Eagle stated in an editorial of January 27, 2009. The editorial was reacting to the awarding of cash bonuses to KB executives charged essentially with the task of shoveling dirt on KB’s grave but it also came in the context of the ongoing U.S. economic meltdown caused by the greedy Wall Street firms operating on the Bain philosophy of corporate profits first and ethics and fairness be damned. Mr. Romney can’t run from his record at Bain where debt was a business strategy that cost workers in Pittsfield and elsewhere their jobs. He’ll have to answer for it.

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